Date post: | 19-Dec-2015 |
Category: |
Documents |
Upload: | gavin-phillips |
View: | 215 times |
Download: | 1 times |
Eckel / Neary
1
Multi-Product Firms and Flexible Manufacturingin the Global Economy
J. Peter Neary
University of Oxfordand CEPR
Eckel / Neary
2
Evidence on Multi-Product Firms
Multi-product firms (MPFs) …
Bernard, Redding, Schott (2006)
- are present in all industries- typically coexist with single-product firms- account for
• 41% of the total number of firms• 91% of total output
- are very active in varying their product mix(50% both add and drop products, 30% drop only, 8% add only
during average 5 year interval)
Eckel / Neary
4
Literature on Multi-Product Firms
• Existence, Market Structure, and Diversification:Brander-Eaton (1984); Klemperer (1992); Eaton-
Schmitt (1994); Baldwin-Ottaviano (2001); Johnson-Myatt (2003, 2006); Grossmann (2005)
• Free Entry Models based on Fixed Costs:Ottaviano-Thisse (1999); Baldwin, Gu (2005);
Allanson-Montagna (2005)
• MPFs and Trade: Evidence and TheoryBernard-Redding-Schott (2005, 2006); Nocke-
Yeaple (2005)
Eckel / Neary
5
Our Contribution
• Develop a new model of multi-product firms (MPFs) based on flexible manufacturing
• Explore intra-firm adjustments within MPFs in partial and general oligopolistic equilibrium (GOLE)
• Show how the existence of MPFs alters predictions of conventional trade models
Eckel / Neary
6
Overview of the Model
• General Oligopolistic Equilibrium (GOLE)[Neary (2002)]
• Continuum of identical industries [0,1], k identical countries, MPFs in all[D.P. has asymmetric countries and industries: similar results]
• Globalization:– Increase in the number of countries– Both a market-size and a competition effect
Eckel / Neary
7
Outline• Consumers and Firms• Industry Equilibrium
– Scale and Scope of MPFs– Comparative Statics
• General Equilibrium– The Global Economy– Adjustment to Globalization
• Extensions– Country/Firm Asymmetries– Free Entry
Eckel / Neary
8
Outline
• Consumers and Firms• Industry Equilibrium
– Scale and Scope of MPFs– Comparative Statics
• General Equilibrium– The Global Economy– Adjustment to Globalization
• Extensions– Country/Firm Asymmetries– Free Entry
Eckel / Neary
9
Preferences and Demand
1
0
( )U u q z u q z dz
Continuum Quadratic Preferences:
2zN
0
21
zN
0
221
zN
0
diziqbediziqe1bdiziqazqu
,,,
zeYzixe1bazip ,,
Neary (JEEA 2003), Ottaviano-Tabuchi-Thisse (IER 2002)
Inverse World Market Demand:
kL
bb
aa
''
Eckel / Neary
10
Costs and Technology of Multi-Product Firms
Demand: eYixe1baip
fdiixicipj
jjjj
0
Profits:
Firm Output: j
diixX jj
0
F.O.C. Scale: YXebicaixe'b jjj 12
F.O.C. Scope: 0jjx
Flexible Manufacturing: c c c i c i w ij j j j j( ) , ' ( ) ( ) ( )0 00
Eckel / Neary
12
First Order Condition: Scale
eYba
YXeba
ix
eYixe1baip
ic
"Cannibalization Effect"
ixMR
ip
Eckel / Neary
14
Equilibrium Output Profile
ix
i
0
iix
"Core Competence"
Product Range
x ib e
a w i b e km X( )' ( )
[ ( ) ' ( ) ]
1
2 11
Eckel / Neary
15
Multi-Product Firms (cont.)
• Prices vary across varietiesCompare models with fixed costs: e.g., Nocke-Yeaple
• Higher prices and lower profit margins on goods further from a firm’s core competence
Prices: p i a w i km b eX( ) [ ' ( ) ( ) ' ] 1
21
Price-Cost Margins: p i w i a w i km b eX( ) ( ) [ ' ( ) ( ) ' ] 1
21
[“km” is the competition effect; “-1” is the cannibalization effect]
Eckel / Neary
16
Scale and Scope Combined
Firm Scope:
Industry Output: Y=kmX
Firm Scale: x ib e
a w i b e km X( )' ( )
[ ( ) ' ( ) ]
1
2 11
X
b
a w
e e kmi di
1
2 1 1
10'
( ' )
( ) ( )' ( )
x w a b e km X( ) ( ) ' ( ) 0 1
i.e., 2 equations in X and
Combine: 2 10
b e X w i di' ( ) ( ) ( ) ( ) ( )
[ ( ) ' ]
(): Cost savings from flexible manufacturing
Eckel / Neary
17
First Order Condition: Scope
YXeba
i
Xe1b2
"Core Competence"
Product Range
Cost savings from
flexible manufacturing
ic
Eckel / Neary
18
Outline
• Consumers and Firms• Industry Equilibrium
– Scale and Scope of MPFs– Comparative Statics
• General Equilibrium– The Global Economy– Adjustment to Globalization
• Extensions– Country/Firm Asymmetries– Free Entry
Eckel / Neary
22
Market-Size Effect of Globalization
Scale: X()
X
Scope: (X)
w a b e km X ( ) ' ( ) 1
0)(
1'
)1()1(2
)'(
'
1dii
kmee
wa
bX
'b
bkL
k L
Eckel / Neary
23
Market-Size Effect on Output Profile
ix
i
Product Range
)]()([)1('2
])1(')([)1('2
1)(
ieb
w
Xkmebiwaeb
ix
Eckel / Neary
24
Competition Effect of Globalization
Scale: X()
X
Scope: (X)
w a b e km X ( ) ' ( ) 1
X
b
a w
e e kmi di
1
2 1 1
10'
( ' )
( ) ( )' ( )
k m
Eckel / Neary
25
Competition Effect on Output Profile
ix
i
Product Range
])1(')([)1('2
1)( Xkmebiwa
ebix
Eckel / Neary
26
Full Effect of Globalization
Scale: X()
X
Scope: (X)
w a b e km X ( ) ' ( ) 1
X
b
a w
e e kmi di
1
2 1 1
10'
( ' )
( ) ( )' ( )
Eckel / Neary
28
Intra-Firm Adjustment
ix
i
x
k
( ) 0
X rises, so infra-marginal products must increase
Eckel / Neary
30
Impact on ProductivityProof here for X; also holds for a price-weighted Divisia Index
Output:
Xw
b ei di
( )
' ( )( ) ( ) ( )
2 1 0
0
diixilMPF
x ib e
a w i b e km X( )' ( )
[ ( ) ' ( ) ]
1
2 11
lw
b ei i diMPF
( )
' ( )( ) ( )[ ( ) ( )]
2 1 0
X
l MPF
( )
( )
Labour Demand:
Productivity:
This is decreasing in
So: globalization encourages “leaner” firms
Eckel / Neary
31
Impact on Product Variety
Low Flexibility 0nN
chigh
High Flexibility 0nN
clow
N km
N
km km
k
Eckel / Neary
32
Partial Equilibrium ResultsProposition 1: In partial equilibrium, an increase in
competition reduces δ and X but raises Y. An increase in the size of the market increases both X and Y but leaves δ unaffected.
Proposition 2: Firm productivity depends negatively on and on nothing else. Hence it rises when competition increases but is independent of the size of the market.
Proposition 3: In partial equilibrium, the impact of globalization on N depends on the degree of flexibility in manufacturing. If flexibility is low, N rises as k increases, otherwise N falls. A necessary condition for a fall in N is that costs are concave in varieties.
Eckel / Neary
33
Outline• Consumers and Firms• Industry Equilibrium
– Scale and Scope of MPFs– Comparative Statics
• General Equilibrium– The Global Economy– Adjustment to Globalization
• Extensions– Country/Firm Asymmetries– Free Entry
Eckel / Neary
34
Overview of GE Model
3 Equations:
Firm Scope: ( , )X w
Firm Scale: X X w ( , )
Labour Market Equilibrium: w w X ( , )
Eckel / Neary
35
Scale and Scope in General Equilibrium
Firm Scope:
Recap:
Firm Scale:
Xb
a w
e e km
1
2 1 1'
( ' )
( ) ( )
w a b e km X ( ) ' ( ) 1
Eckel / Neary
37
Labour MarketLD Multi-product Firms:
0
diixilMPF
Labour Market Equilibrium: L mf m i x i di
( ) ( )0
Combine with FOC (scale):
L
mf
b ei a w i b e km X di
1
2 11
0' ( )( ) ( ) ' ( )
Combine with FOC (scope):
2 10
b eL
mf w i i di' ( ) ( ) ( ) ( )[ ( ) ( )]
a b e km X w ' ( ) ( )1
x ib e
a w i b e km X( )' ( )
[ ( ) ' ( ) ]
1
2 11
Eckel / Neary
38
Labour-Market Equilibrium
X
w
LL: w(X)
L
mf
b ei a w i b e km X di
1
2 11
0' ( )( ) ( ) ' ( )
Eckel / Neary
40
Adjustment to Globalization in GE: Summary
• Market-size and competition effects as in PE
• Responses of X and as in PE
• Wage rate may rise or fall (presumptively rises in linear case)
• Product range more likely to fall when w rises
Eckel / Neary
41
Outline
• Consumers and Firms• Industry Equilibrium
– Scale and Scope of MPFs– Comparative Statics
• General Equilibrium– The Global Economy– Adjustment to Globalization
• Extensions– Country/Firm Asymmetries– Free Entry
Eckel / Neary
42
Multi-product firms with longer product lines and more flexible technology tend to respond more to shocks
Industry Equilibrium: Heterogeneous Firms
hh
jj
h
j
d
d
wheree
e eand cj
j
jj j
jj:
( )
( )[ ( )]
2
2 11
)1('2
)(
')(
)1(2)(
1 eb
wXXY
w
eYba
e
e
jj
j
km
j
jj
jj
Eckel / Neary
43
In free-entry equilibrium, profits are:
• Decreasing in m: Negative competition effect
• Increasing in L: Positive market-size effect
• Increasing in k: Market-size effect dominates
Hence: Rise in k encourages entry, reinforcing earlier results:
• Firm output may fall, but national output mX must rise
• falls, so productivity rises
Free Entry
0
0j
j j j jp i c i x i di f
Profits:
0
' 1 ( )b e x i eX x i di f
2 2
0' (1 )b e x i di eX f
Eckel / Neary
44
i.e., Effect on diversity is qualitatively the same as in no-entry case, but magnified in absolute value
Free Entry (cont.)
Effect on Product Diversity:
ln ln ln1
ln ln ln
d N d d mN km
d k d k d k
ln ln ln ln1
ln ln ln ln
d m d m
k m d k d k
ln ln ln1 1
ln ln ln
d N d m
d k k d k
Effect on diversity with no entry
ln ln:
ln lnBUT
k m
Recall: No market-size effect on diversity with no entry
Magnification effect
Eckel / Neary
45
Conclusion• Globalization can have a considerable impact on both scale
and scope of multi-product firms Introduces a new margin of adjustment: Intra-firm extensive margin
• “Cannibalization effect” crucial→ Oligopoly important
• Impact on scope depends on wage effects→ General equilibrium important
• New source of gains from trade: productivity increases, as firms become “leaner”: concentrate on their core competence
• New source of losses from trade: Variety may fall
• Impact on variety depends on flexibility→ Fall in diversity possible even with symmetry & w/out entry
Entry (inter-firm extensive margin) reinforces intra-firm effect